Who writes the rules writes the market

CNBC reports that a bill to regulate digital assets is due for a preliminary Senate vote next week, and that Coinbase has chosen this precise moment to partner with a firm called Moov, extending stablecoin capabilities to community banks across the country. The timing is not accidental. When legislation is imminent, the prudent merchant does not wait outside the chamber — he takes a seat at the table.

Let me say plainly what a stablecoin is in terms I can reason about: it is a privately issued token that promises to hold a fixed value, typically because its issuer holds an equivalent reserve of public currency or sovereign debt. It is, in other words, a private banknote. I knew private banknotes well. In my own century, Scottish banks issued them freely, and the system worked tolerably — tolerably, not perfectly — because note-holders could demand specie on presentation, and competition among banks kept any single issuer honest. The discipline of redemption was the institutional framework that made the exchange trustworthy.

The question a legislator must ask of any stablecoin bill is therefore the same question I would have asked of any private note-issuing bank: what is the redemption guarantee, who examines the reserves, and who bears the loss when the issuer fails? These are not technical questions about blockchain architecture — I am content to defer on the engineering. They are the oldest questions in political economy, and they admit of no new answers merely because the ledger is digital rather than paper.

What alarms me, on inference from the CNBC report, is the pattern of regulatory capture I described when writing of the great chartered companies of my own day. A large and sophisticated firm — Coinbase, in this case — moves to embed its infrastructure inside community banks just before the rules are written. If the resulting legislation defines 'lawful stablecoin' in terms that only a firm of Coinbase's scale can satisfy, then the bill that looks like consumer protection will function as a barrier to entry, a private toll on a public traffic. The merchant has arranged, once again, to be the one who drafts the weights and measures.

I do not say this is what has happened. I say it is what consistently tends to happen when the regulated and the regulator share a drafting table. In The Wealth of Nations I observed that people of the same trade seldom meet together, even for merriment, without the conversation ending in some contrivance against the public. The modern Shard sees no reason to revise that observation simply because the trade now involves cryptographic tokens rather than wool or corn.

The proper institutional framework for a stablecoin is, in principle, not mysterious: mandatory reserve disclosure audited by a public authority, a clear right of redemption at par enforceable in law, and no monopoly privilege granted to any single issuer or network. Community banks are themselves a form of distributed competition — small enough to be disciplined by their depositors, numerous enough to prevent any single failure from becoming a systemic one. If Moov and Coinbase genuinely extend that model into digital currency, the public gains. If the partnership instead uses community banks as a distribution channel while concentrating the reserve-management and fee income at the centre, then the community bank is the familiar figure of my pages: the retailer who believes he trades freely while the wholesaler sets every term.

The Senate should write rules that answer one question above all others: when this stablecoin fails — as some surely will — who is made whole, and by whose resources? Answer that honestly, and the rest of the architecture will follow. Leave it unanswered, and you will have legislated not a framework for honest exchange but a license for the next generation of East India Companies, dressed in the vocabulary of financial innovation.